STS Digital scales up crypto structured products, partners with Kraken

Crypto derivatives trading firm STS Digital is doubling down on the structured products’ liquidity providing segment as part of its roadmaps after it raised US$30m last month despite the crypto market being in an extended bearish phase since last October.

The target is to reach over US$100m in structured products’ traded notional by the end of the year - Jeremy Dominh

The Bermuda-based trading firm is looking to scale its liquidity providing capabilities on crypto coin-linked structured products, with an initial push on widely traded structures such as accumulators, decumulators, bonus certificates, reverse convertibles and dual currency investments traded on an over-the-counter (OTC) basis in the second quarter, Jeremy Dominh (pictured), head of structured products, told SRP.

The addition of autocallable yield enhancement products will be added by the end of the year, he said. 

The firm plans to tap into third-party infrastructure providers, such as Chartered Investment and GenTwo, to issue structured notes through special purpose vehicles (SPV). Its liquidity-providing channel offers over 400 cryptocurrency exposures, including major coins like Bitcoin and Ether and other altcoins.

The buildout is aiming to attract client segments from both the underserved traditional finance and crypto-native firms that look for specific options and derivatives expertise and seek bespoke solutions fitting their complex risk profiles, according to the Singapore-based head.

“[The expansion] makes a lot of sense for us as it allows us to diversify our target audience to allow both crypto-natives and traditional finance investors to be on an equal footing in their ability to generate risk-optimised asymmetrical returns on digital assets,” Dominh said.

“Family offices, private banks, asset managers and asset allocators in general, have shown growing interest in the asset class with the professionalisation of its infrastructure and regulatory framework and are yet to face an institutional player to serve them at their level. That’s where we come into play.”

Since the start of the year, the firm has already started trading reverse convertibles, bonus certificates, and accumulators with an average ticket size of US$1m in notional. It has tapped Kraken’s OTC options platform and has acted as a hedging provider for vanilla option trades.

The target is to reach over US$100m in structured products’ traded notional by the end of the year, said Dominh.

Co-founded by two derivatives traders Gideon Hyams and Maxime Seiler, STS Digital has been an active liquidity provider for spot, vanilla and exotic options since 2022. In February, the firm announced it closed a US$30m round led by CMT Digital, with participants from Kraken exchange parent Payward, Strobe Ventures, Arrington Capital, F-Prime and BitRock Capital.

Dominh – who joined the firm last year from Leonteq with a structured products sales and structuring background – noted that the firm is also gearing up for its proprietary quantitative investment strategies (QIS) business, where he sees one of its competitive advantages in the market, adding his team is currently in talks with crypto-native clients to develop “several systematic strategies,” without elaborating details.

The firm is planning to hire additional salespeople in the next 12 months – one covering Europe, the Middle East and Africa and the other covering Asia Pacific – to make up a team of seven focusing on the structured products business, which is a global-facing launch.

With issuances through a SPV set-up, structured notes investors may be subject to credit risk from SPVs.

STS Digital can use spot crypto and perpetual futures on institutional centralised exchanges (CEXs) and decentralised exchanges (DEXs), as well as risk recycling methods to hedge its positions.

The company’s latest entrance has intensified the competition among crypto trading firms, including QCP, GSR, and OrBit Markets.

The new player’s foray into the crypto structured products segment is also coinciding with the crypto winter, with Bitcoin’s price falling from US$124,000 in last October to just around US$71,000 today.

^{Bitcoin’s performance over the past year}

_{*Data as of 25 March afternoon Asia time
Source: Investing.com}

The crypto market’s downturn didn’t entirely spook the crypto-native crowd, Dominh pointed out. “Crypto native investors are maybe a bit more cautious than last year,” he said. “But at the same time, most of them have been through the different bear cycles and are simply staying on the sidelines, waiting for the storm to pass and ready to deploy capital. And there’s also a lot of smart money, ready to place tactical trades whenever opportunities arise.

The current institutional conviction in crypto is also a “very strong signal” compared with previous bear market cycles, he said. “We are seeing tier one bulge bracket investment banks and asset managers heavily investing in their infrastructure to make sure their offering matches the demand.”

“As the debasement trade keeps playing out, we also see Bitcoin slowly decorrelating from gold and tech stocks, which means investors are increasingly perceiving it as its own asset class with its own ability to be a viable store of value and inflation hedge, the change of narrative is very positive for the industry and the adoption of digital assets in general,” he concluded.

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